Welcome to Q2-2015!

As you are likely very busy in quarter-end work and I am just wrapping up the presentation details for a day-long, municipal compliance speaker event which will be held out-of-state, I feel a shortened, although still active edition of the Minutes this week would be mutually beneficial..for you and me.

So…here goes…the “Mini” edition of the Monday Muni Minutes!

Enjoy and have a great week!  Deb

CURRENT EVENTS 

IRS to OK Housing Bond Issuer – Your Bonds Are Taxable

In last week’s edition, we shared how an Arizona issuer’s bonds are being challenged regarding leases and PABs….this week our attention turns to the Tulsa County Industrial Authority.IRS pic

In the event notice posted on EMMA last week, a “Final Notice of Adverse Determination” by the IRS was disclosed regarding $35 million in variable rate auction bonds issued in 2003 to American Housing Foundation (AHF), a conduit public trust borrower providing affordable low income housing.

The proceeds were then loaned to AHF Tulsa, LLC, a 501(c)(3) subsidiary of AHF, which later had its exempt status revoked.

An unusual case with twists and turns, the creditors initiated involuntary bankruptcy proceedings after the founder died in a car crash, which was later ruled a suicide.  Creditors were owed more than $26.3 million.

It was later discovered that the founder transferred life insurance valued at $24 million from the benefit of the trust to himself and his family.

In 2009, AHF filed for voluntary bankruptcy and the housing units were transferred to creditors as part of the settlement in October 2011.  The bonds were then cancelled in November 2011, as they were deemed worthless.

Additionally, in December of last year, the IRS revoked the 501(c)(3) status of the bonds retroactively back to January 2006. Under the Regs, bonds lose their tax-exempt 501(c)(3) status at the time a borrower takes deliberate action leading to the revocation of its status as a “qualifying organization.”

Ouch!

So, what does this mean to the bondholders?moneyQs

Well, this typically means the IRS believes that bondholders need to pay income tax on the interest they earned on the bonds after the date of revocation.  In this case, that means they could owe for tax years 2011 forward, although under the three tax year rule, 2011 will be closed after April 15th.

In its final determination letter, the IRS said the authority must file “corrected information returns, Form 1099, must also be filed with the IRS and issued to the bondholders as required under section 6049 of the Internal Revenue Code.”

Also, these “adverse bonds” were issued along with taxable and tax-exempt bonds by five other issuers in three different states – Texas, Florida and Arizona.

So will the “adverse” ruling have an impact on those remaining outstanding bonds which were issued at the same time?  We shall see…

[Editor’s Note:  This case highlights one of the challenges of conduit issuer/conduit borrower bonds…and the adverse determination that may end up impacting five other issuers who had nothing to do with AHFs deliberate actions.]

IRS Audits Texas Transportation Bonds under Current Segment InitiativeTranspotation audit

As we continue to follow the “segmentation audits”, the IRS is auditing another chunk of bonds in the transportation area…the North Texas Tollway Authority’s $178.4 million in revenue and CP bonds, issued in 2009.

A routine audit, the NTTA notice said “The letters from the IRS stated that such debt issuances were selected for examination as part of a project/initiative involving transportation bonds and that the IRS has no reason to believe such debt issuances fail to comply with any applicable tax requirements,” according to the notice. “NTTA intends to cooperate with the IRS with respect to the examinations.”

NTTA disclosed this audit in a supplement to their preliminary official statement as they are preparing to issue $871 million in 2nd tier refunding bonds, which are due to price this week.

It should also be noted that the NTTA does not believe this IRS audit is related to the FBI investigation regarding possible conflicts of interest conduct by several of its former and current board members, which has been ongoing since 2011.

In the NTTA’s POS, it states, “The Authority has no reason to believe that it is the target of the investigation or that the investigation will materially adversely affect the operations or financial condition of the Authority,”

The POS further discloses, “The investigation is ongoing and the Authority is cooperating fully with the FBI. There can be no assurance that the investigation will be limited to the matters described above or that the Authority will not become a target at a later date.”Car money

[Editor’s Note:  So, NTTA officials and staff are in the market pricing a substantial refunding for savings AND working on their IDR documentation at the same time.  Ugh.

While there is no indication of any wrongdoing, the timing and amount of effort this will take is challenging, to say the least.  Oh yeah, and they still have a public entity to run on top of everything else.  Stay strong NTTA team! ]

OUT & ABOUT)

Conferences: 

The Bond Buyer’s Midwest Municipal Market Symposium
June 30, 2015 InterContinental Chicago Magnificent Mile, Chicago, IL

Resources:

Munivestor.com

There are some really neat tools on this site. Additionally, each week, a new bond series is being featured – which provides insights into current public offerings around the country.

On-Demand Post Issuance Compliance Training for IssuersOnline learning

“Compliance Basics” – a Free, 3-part video training, plus the Monday Muni Minutes

On-Demand Webinar

Resource:  On Demand Replay of Continuing Disclosure after MCDC

Slides:   Final Slide Deck for Continuing Disclosure after MCDC

Downloadable White Paper:  Jargon Watch

Ever wonder what a Black Swan is or Break the Buck means?  Find out here.

Muni Market Minute Updates

(Quick news bits on topics we’ve covered in earlier MMM editions!)

Major Transportation Bill Set to Become Law in GA

While we continue to monitor the uncertain status of the Highway Trust Fund and its ripple effect impact on the states, last week Georgia forged ahead with what it calls a “landmark transportation bill.”

Once signed into law by Governor Nathan Deal, this bill will provide up to $900 million for needed roadwork.spend

“Georgia’s legislators demonstrated leadership, foresight and courage … as they took the tough but much needed steps to pay for our ever-growing transportation needs,” Deal said last week. “I look forward to signing this legislation into law.”

House Bill 170 changes the gas tax, which has remained unchanged since the 1970s.

The biggest changes are:

  • Phase out the 4% sales tax on gas
  • Raise excise tax to 26 cents per gallon on gas and 29 cents for diesel
  • Future rates increases will be tied to the CPI
  • Add new registration fees for electric, propane and hybrid vehicles
  • Remove sales tax exemption on jet fuel used by air carriers
  • Assess a $5 per night fee on hotel and motel rentals of less than 30 days

HB 170 also creates more “special districts” to fund bus and rail mass transit.  These would be funded by special purpose local sales taxes that would require a referendum.  It also applies to busescounties, the GA Regional Transportation Authority and the Metropolitan Atlanta Rapid Transit Authority.

With more than $1 billion in road needs, transportation was a priority for the state’s lawmakers.  Additional bonding is also expected, to supplement the tax increases.

Governor Deal explained, “Transportation is a huge point of concern for businesses that we court to Georgia, and addressing those needs is one of many tough tasks we must perform to rev up our jobs engine.”

[Editor Note:  Georgia is taking a diverse “basket approach” tpo increasing fees to fund their transportation initiatives.  More states appear to be following suit.  I would love to hear your comments on this – what is happening in your state?]

Illinois Chapter 9 Proposal Faces Big Hurdles

As shared in prior issues, municipal bankruptcy concerns have definitely captured the attention of bondholders and citizens alike in recent months.

Illinois, which has been really struggling financially at both the state and local levels, lacks statutory Chapter 9 bankruptcy laws allowing local governments in their state to even file for such protection.  Currently the only exception to this is the Illinois Power Agency.

However, budget woes and legislative partisanship makes passing Chapter 9 laws as well as the proposed constitutional amendment on pensions – well, dicey – to say the least.shrinking budget

What is also dicey is the state’s current $1.4 billion deficit, combined with the $3 billion tanking in income tax revenues projected for the upcoming budget cycle.

Add to that the little matter of over $100 billion in unfunded pension liabilities…

Newly-elected Governor Bruce Rauner added both items to his “Taxpayer Empowerment and Government Reform Package” section of his budget, including points to “pursue permanent pension relief through a constitutional amendment” and “extend to municipalities bankruptcy protections to help turn around struggling communities.”

Currently, small local communities with populations under 25,000 can seek relief under the “Fiscally Distressed City Act” in the state, but the proposed bankruptcy amendments would provide benefits – but should also be seen as a “last resort.”

State Republican Representative Ron Sandack, has introduced House bill 298 to allow Chapter 9 filings, with approval of the State.

“As more and more municipalities are looking for relief and ways to deal with rising pension liabilities and other costs, this is a tool that can help them stabilize and reorganize financial affairs Accountability 3in ways that benefit taxpayers,” Sandack said in a statement.

Municipal bankruptcy expert James Spiotto, managing director of Chapman Strategic Advisors, LLC, has suggested the creation of an oversight authority, which would intervene and work with local governments before their finances reached the crisis stage.

Hmmm…that proposal sounds familiar, doesn’t it?

[Editor Note: To bring this full circle from an earlier article on Illinois pension woes, the constitutional amendment on pensions could be a long-term solution if the Illinois Supreme Court overturns the pension overhaul passed by lawmakers in 2011.]

 

In closing, we hope you found this week’s “Mini” edition of the Monday Muni Minutes valuable and informative.

As always, your comments, insights and suggestions are welcome!

To your compliance success,

Debbie

Debbie Todd (sig)

 

 

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P.S.  Remember, invite your issuer friends to join us on Issuer 2 Issuer and to get their free online training, PIC Basics!  Also, details will be coming on the re-release of “PIC Essentials” very soon.

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